Housing sector: A glimpse into the problems and possible solutions

HYDERABAD: The housing sector defines the overall social health of the population of a country. Apart from its contribution to the country’s GDP, construction of housing increases the civil welfare of a society by improving the social capital of a nation. Consumption expenditure by individual and households consists of a sizeable mix of expenses incurred on rent, utilities, related taxes, etc., all of which are also contributions of the housing sector, to the GDP of an economy.

Statistics over the last five years show the increasing correlation of the GDP and real estate activity. For most countries, the correlation is over 0.9, stressing on the importance of the sector in the economic growth. The progress of the housing sector not only has direct but indirect as well as induced effects on the country’s economic growth. The GDP multiplier for the housing sector in India far exceeds the direct consumption effect of nearly 0.78 estimated by LIC Housing Finance Limited, due to the indirect and induced effecton 300-plus ancillary industries.

Housing being a key sector, it becomes imperative for the governments to focus on and adopt policy measures that accelerate housing development, in turn, boosting economic activity through direct and indirect means.

There being a high correlation between the real estate activities and a country’s GDP, there is clearly a need for a strong and healthy real estate sector. However, there are varied problems faced by the housing sector which are impacting the developers and the buyers and consequently, impeding the economic growth of the country.

Prolonged regulatory processes leading to project launch and completion delays:

One of the key issues faced in the real estate housing sector are the prolonged regulatory processes that lead to project launch and completion delays. Though there are a variety of factors contributing to the delays such as bottlenecks in the supply of raw materials and labour, difficulties in accessing funds, etc., it is primarily the process of complying with regulatory approvals that is contributing substantially to the delays. The construction approval process is complex, and as per the report of the committee on streamlining approval procedures for real estate projects set up by the MHUPA, there are a minimum of 34 regulatory processes to be followed by a developer for obtaining construction permits, which takes an average of 227 days.

In metro cities like Bengaluru, Chennai, Mumbai, NCR, etc., the current regulatory processes take an average of 18-36 months’ time. The delays in approvals and adherence to regulatory processes, can raise the construction costs by up to 40 per cent, which inadvertently gets passed on to the buyers, making housing unaffordable and forcing buyers to exceed their budgets.

Having a single window clearance for all the approvals, will drastically bring down the delays and the costs related to corruption. Given the availability of technology, processes can be automated and the need for human intervention can also be reduced substantially. Some cities such as Ahmedabad, Chennai, Cochin, Kozhikode, Madurai, Trivandrum, Pune, etc., are already implementing an automated system for approving building plans. Such measures need to be implemented across the country and used in other processes too, for reducing the time and costs involved.

Land related problems:

Limited supply of developed land with basic infrastructure in place, leads to increase in land prices, which in turn, leads to high cost of housing. Unfavourable land management policies prevalent in some states, like the Urban Land Ceiling and Regulation Act (ULCRA), are some of the major roadblocks faced by this sector. Though the Act has been abolished by the central government, it is still in effect in some states. Further low utilisation of available land through low floor space index (FSI) ceilings set in different cities, leads to lesser residences getting developed on a piece of land. This translates into lower income for the developers, who instead, raise the per unit cost to cover the land costs.

Considering that developable land is limited and the urban population is ever increasing, vertical growth of cities is extremely critical. Apart from revision of FSI norms, other land reforms also need to be undertaken. Land pooling schemes which are already implemented in Delhi and Gujarat, are some innovative methods to acquire land at a fast pace but at reasonable rates and should be encouraged across the country.

Funding problems:

Gathering initial funding poses a big problem for developers, curtailing the housing supply to a large extent. Absence of longterm funding from banks, is forcing developers to look at alternative sources of funds, most of which do not offer affordable interest rates resulting in the supply being stifled.

High inflation rates have also affected the buying ability of an individual and have considerably reduced their savings. Increasing housing prices are further compounded by the high interest rates on mortgages. Housing finance corporations (HFCs), non-banking financial companies (NBFCs), micro-finance institutions (MFIs), private equity investors (PEs), etc., should be encouraged through simpler regulations and proper incentives should be given to increase the inflow of funds to the sector. Further, the RBI should expand its scope for ‘priority lending,’ to cover even lending to developers involved in low-cost and affordable housing as cheap funding is extremely critical for them to develop low cost housing projects.

In addition, SEBI’s move to allow REITs to operate in India in the future, would be a sign of maturity of the Indian real estate markets as globally, REITs are found in mature economies. REITs would also bring in more transparency as the developers and investors would have to abide by the procedures and obligations prescribed by law. Providing tax incentives for REITs for investment in housing, especially the affordable housing sector, will give a much needed fillip in making these successful.

The tax element for the purchase price of the house varies between 30 to 37 per cent in most cities, which includes direct and indirect central taxes, state taxes like VAT, LBT, stamp duty, municipal taxes, cess, premiums and development charges, etc. In cities like Mumbai, merely a single cess like fungible premium accounts for 10 to 15 per cent of the sales value. Hence, rationalisation of taxes is one of the key ‘mantras’ to reduce housing prices.

Manpower and technology problems:

The housing and construction sector is the second largest employment generator after agriculture in India, and employment in the real estate sector is estimated to have a 20-30 per cent share in this. Despite being the second largest employer in the country, the construction sector as a whole faces manpower shortage. The sector is heavily dependent on manual labour and faces longer timelines for construction completions, resulting in supply getting deferred.

Hence, technologically faster and alternative methods of construction should be adopted on a large scale and special training for certain skills should be imparted. Special construction equipment, construction materials and manufacturing units, should be provided at subsidised rates and excise duty should be waived off for pre-fabricated construction elements.

The housing sector in India holds tremendous potential to have a positive impact on the economic and social development of the country. Specific measures are a must to remove the problems faced by the housing sector and incentives are necessary to aid the development of housing projects. It is imperative that the government adopts successful strategies from developed and developing nations to ensure that the basic housing need of the country is satisfied.

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